Canadian Dollar bounces from eight-week lows as Middle East peace hopes soothe markets

USD/CAD pulls back to 1.3900 from eight-week highs at 1.3925.
A moderate optimism after the Israel-Lebanon ceasefire deal has hit the safe-haven USD on Thursday.
The Canadian Dollar remains 0.8% down on the week with US and Canadian employment data on tap.

Guillermo Alcala FXStreet

The Canadian Dollar (CAD) keeps losing ground against the US Dollar (USD) on Thursday, but it has reversed most of the daily losses, as news of a deal between Israel and Lebanon has boosted hopes of progress in the US-Iran peace plan. The USD/CAD pair is trading just above 1.3900 at the time of writing, down from eight-week highs of 1.3925 but still up 0.8% on the week.

Lebanon’s President Joseph Aoun said earlier on Thursday that he is awaiting responses from all parties to an agreement reached with Israel to implement the ceasefire. Investors have reacted with moderate optimism to the news, although risk appetite remains subdued amid a lack of progress in the US-Iran peace process.

US data feeds hopes of Fed tightening

In the macroeconomic domain, recent US data have been Dollar-supportive. On Wednesday, the ADP Employment Change report showed a stronger-than-expected increase in net jobs in May, while the US ISM Services Purchasing Managers’ Index (PMI) revealed healthy business activity and strong price pressures. These figures strengthen the case for a Federal Reserve (Fed) rate hike in the near-term, if inflationary pressures remain at high levels.

The focus on Thursday is on US initial Jobless Claims, although the highlight of the week is Friday’s Nonfarm Payrolls report, which is expected to show that the US economy created 85K new jobs in May and that the Unemployment rate remained steady at 4.3%.

At the same time, Statistics Canada will release May’s Canadian labour market numbers. In this case, net employment is seen increasing by 10K in May, following a 17.7K decline in April, while the Unemployment Rate is expected to remain unchanged at 6.9%.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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